What are the Risks of Hiring Independent Contractors?

By 2021, nearly half the private workforce is predicted to have spent time as an independent worker at some point in their lives. This growing trend of independent work is not only a valuable source of talent for businesses, but its proliferation has also made it easier for businesses to compliantly engage independent workers with minimal risk.

Despite these positive changes, navigating how to properly work with this talent segment can be confusing with evolving laws and lack of precedent. Here are five risks you may encounter when hiring independent contractors, and the steps you can take to minimize them.

Employee Misclassification

One of the biggest risks of independent contractor engagement is misclassifying employees as independent contractors. Unfortunately, there’s not a standard test to determine employee classification, which can complicate the hiring process.

Because misclassification consequences are big—paying back-taxes with interest, large fines, or class-action lawsuits—it is important to have a classification process that puts policies in place for hiring and managing your independent workforce. Use federal government, state government, and agency tests as guidelines to create a questionnaire or checklist when determining worker classification.

Once your business has a classification process in place, the independent workforce provides great staffing flexibility. You can outsource work on a project-by-project basis, which is helpful if your business has fluctuating workloads, and you can avoid the expense and potential legal consequences of firings or layoffs. With a bit of work and insight, misclassification is manageable. Working with a firm like MBO Partners that has an established methodology for evaluating and engaging independent workers can also help to minimize your risk.

Keeping Independent Contractors Independent

Independent contractors are responsible for performing the service outlined in a contract or SOW, and maintain certain autonomy because of this. You cannot interfere with their work too much, or you risk making them look like your employee, which can lead to lawsuits and fines. Interference can come in the form of trying to control how the contractor performs their work, allowing them to use company equipment or work facilities, or providing them with job training.

To avoid treating a contractor like an employee, your contract or SOW should be as clear as possible. Spell out specific tasks or deliverables and use dates, numbers, and defined results when possible. Avoid having independent contractors perform the same work as employees. Contractors should provide their own equipment, set their own hours, and direct how and when they do their work, unless otherwise specified by their contract. Make sure relevant managers and employees are aware of these rules and restrictions.

With divisions in place, you should feel confident using independent workers. You’ll often receive higher-quality, more specialized work, and see a faster hiring to productivity time. Furthermore, independent contractors bring their own benefits and are responsible for their own taxes. You do not need to provide typical employer benefits, unemployment insurance, or workers’ compensation insurance.

Audit Risk

If state or federal agencies think you may have misclassified employees as independent contractors, you are at risk for an audit. Aside from misclassification, a contractor who files for unemployment, a whistleblower who reports misclassification, or a worker who files an SS-8 form to request classification determination may trigger an audit.

Fortunately, there are a number of steps you can take to reduce your audit risk including: conducting an internal audit to determine whether or not your current classification practices are compliant, creating guidelines for hiring independent workers, ensuring independent workers are properly classified, having a written contract for all independents you hire, and forming a team to handle issues before they arise.

Liability Concerns

Any independent contractor you hire will not be covered by your company’s workers’ compensation policy, which can make you liable for injuries a contractor suffers on the job. In order to avoid this, work with contractors to build necessary insurance requirements into their contract before they start work. Unless specified by contract, independents are also not protected by workplace safety, anti-discrimination laws, or unemployment compensation benefits.

Co-employment Considerations

Co-employment occurs when two companies both have rights and obligations as an employer. This commonly happens when staffing agencies hire independent contractors for their clients. In this situation, because both the staffing agency and client have obligations to the contractor—the staffing agency may provide payment, and the client may determine the assignment—they can both be viewed as an employer. Co-employment can increase the risk of litigation when a contractor thinks they should be treated as an employee, or if your company is audited and found to have treated contractors as employees, or vice versa.

For example, in the Microsoft vs. Vizcaino lawsuit, the court found that Microsoft had treated a number of independent contractors they hired as employees. The contractors had worked on teams with regular employees, shared the same supervisors, performed the same functions, worked the same hours, and worked on-site using Microsoft’s equipment and supplies. The lawsuit cost Microsoft nearly $100 million.

To avoid co-employment, make sure any staffing agencies you are using have a process in place to properly classify independent workers. Also be sure to implement specific policies and procedures for how managers and employees should interact with contractors to avoid the trap of treating them like full-time employees. Partnering with a firm like MBO can help you navigate these processes and procedures, lower your risk, and assist in compliantly engaging independent talent.